California provides for special tax incentives to encourage investment in specific geographic areas targeted for economic revitalizing called Enterprise Zones within the state. One of these incentives is the net interest deduction. It is available to banks and other lenders. The requirements are simple. If a bank or lender makes a qualified loan to a qualified debtor, it is allowed to deduct the net interest received from such loan against its California taxable income.To be a qualified transaction, the loan must be made to a debtor that is engaged in a “trade or business” in an Enterprise Zone. The term “trade or business” is generally defined for tax purposes as “an activity engaged in forprofit.” When a bank or lender makes an otherwise qualified loan to a nonprofit organization, the question arises as to whether a nonprofit is engaged in a trade or business, and thus considered to be a qualified debtor for the purposes of the net interest deduction.

In the past, we disallowed debts made to nonprofit organizations based on the general presumption that nonprofit organizations are not engaged in a trade or business as defined under various tax provisions in the Internal Revenue Code and the California Revenue and Taxation Code.

However, California recently revised this policy based on statutory authority in the California Corporation Code that suggests a nonprofit could be recognized as being engaged in a trade or business. The California Corporation Code which governs nonprofit entities affirms the nonprofit’s right to “carry on a business at a profit,”and use that profit for any lawful activity.” Many nonprofit organizations accept donations, conduct fundraising activities, or charge fees. This revenue is used to sustain the organization, pay salaries, interest, fund capital improvements, expansions, etc. These activities are similar to a trade or business engaged to earn a profit.

Therefore,qualified loans made to nonprofit organizations can qualify for the Enterprise Zone net interest deduction if the debtor meets all the other required qualifications.

Tax-Exempt Bonds

Tax-exempt, industrial-revenue bond (IRB) programs are attractive financing options for small manufacturers looking to expand operations and upgrade facilities.What is a Tax-Exempt Bond?Tax-exempt bonds are debt securities issued by a state or local government development agency on behalf of a private business. Once issued,tax-exempt bonds are sold in the open market or purchased by investors or financial institutions. Interest income earned by the bond purchaser is exempt from state and local taxes, which allows the lender to pass savings to the borrower in the form of lower interest rates.Tax-exempt bonds are similar to conventional loans.

Bonds are not grants. Borrowers have to pay back the bond’s principal plus interest to the bond. Applicants have to demonstrate a strong business plan and project proposal, credit worthiness and strong financial statements. In addition,borrowers have to demonstrate how proposed projects will create jobs and positively impact the local economy. Unlike conventional loans, tax-exempt bonds typically offer longer-term financing at considerably lower rates than conventional financing allows.Tax-exempt bonds are not for modest projects. Typically dollars, but smaller, mini-bonds may be issued. In addition, the costs associated with tax-exempt bonds tend to be much higher than conventional loans because the business has to pay its own legal costs.

Carefully consider, bonds are intended to fund projects over a million r your financing needs and your ability to pay tens of thousands of dollars in legal fees before jumping into tax-exemptbonds.What are the Eligibility Requirements? Tax-exempt bonds are intended to create jobs and improve economic conditions in local areas. Businesses eligible for tax-exempt bonds include manufacturing businesses and non-profit organizations. Tax-exempt bonds of up to $10 million can be issued to finance up to 100% of an eligible project.

Eligible users of the funds include expanding facilities and purchasing new machinery and equipment.

Tax-exempt, RIB funds may not be used to refinance existing debt or for venture and working capital.

Other special conditions and terms may vary depending on where your business is located.What is the Application Process? Application requirements and processes vary by state and locality.

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